Tim Low, Vice President of PayScale and Mykkah Herner, Compensation Consultant at PayScale, contributed this article to BusinessNewsDaily's Expert Voices: Op-Ed & Insights.
Helping companies with 50 to 150 employees get a grip on their compensation strategy can be a very rewarding experience. When companies grow to this size, there's a general understanding of the current approach for setting compensation isn't working, yet there is also concern about developing something too rigid.
Today, many small organizations are lifting their salary freezes as the economy stabilizes. Recent research shows small companies are increasing salaries more rapidly than medium or large organizations, perhaps indicating they are playing catch up in the talent market. Creating a clear compensation strategy will help small businesses to better allocate their limited compensation budget and stay competitive in the new economy.
Here are three steps for small businesses to follow when creating a compensation program:
Keep up with the Joneses
Build a compensation strategy that reflects the reality of the market. First, clearly define "the market" to determine appropriate benchmarks for the various positions at the company. Remember, not all sources of salary information are created equal, so check the quality and accuracy of the data before using it is as a baseline. Here are some critical questions to ask when evaluating market data to build a compensation plan:
- How is the market defined?
- How competitive is the company within the market and against its competitors?
- Which factors should be rewarded most with compensation? (i.e. specific skills, experience, training or certification, etc.)
Develop a salary structure
Ensure positions are fairly weighted against one another by establishing a salary structure with pay grades. Analyze the positions relative to the market and then ensure the new structure also reflects the relative internal value of the positions. A clear salary structure can also help in the following ways:
- Legal protection — By creating a range for software developers, for example, and placing all developers within the range, companies can more easily defend against inequity claims. (Typically organizations of approximately 100 employees begin developing more sophisticated practices across their business, so it's natural time to include compensation policies.)
- Scalability — A compensation structure streamlines the administrative burden of building a new range for a position every time a job is posted. It also enables swift and easy scaling as the organization grows because it establishes clarity for leadership, managers and employees around the internal value of various positions.
Determine how to reward performance
Create a pay-for-performance culture. Many small businesses wait until the company grows before considering performance philosophy — that's a bad idea. Rewarding stellar performers at small organizations is critically important because one employee really does make a huge difference. However, this doesn't require a ten-page performance evaluation that takes almost as long to administer as it does to perform the core responsibilities. A simple rating system to determine whether an employee "exceeds expectations," "meets expectations," or "does not meet expectations" is sufficient to link performance to pay. There's also a new breed of performance management tools that make linking performance and compensation easier than ever before.
Creating a compensation plan is important, but it doesn't need to be daunting. The type of structure a small organization adopts should be much simpler than their larger, more complex, counterparts. Yet, these businesses should implement something simple and clear now, since it only becomes more difficult to put a plan in place once the company grows. For small organizations, building a compensation program goes a long way toward translating the organization's goals into actionable talent plans and creating a solid foundation for future growth.
The views expressed are those of the author and do not necessarily reflect the views of the publisher.